Trump administration to seize wages of student loan defaulters - here are the key details

Student loan defaults have hit a record high, with the number of defaulters in the U.S. reaching 5.5 million by late 2025. The Trump administration has already announced that it will end the Biden-era student loan forgiveness program, and is now set to block the wages of defaulters starting in January, the Education Department confirmed on Tuesday. The department expects around 1,000 defaulted student loan borrowers to get the notices of administrative wage garnishment, a spokesperson told CNBC. As per the publication, this will be the first time that a portion of the borrowers' income will be at risk since the Covid-19 pandemic, when collection was halted.  

“We expect the first notices to be sent to approximately 1,000 defaulted borrowers the week of January 7, and the notices will increase in scale on a month-to-month basis,” the Education Department said in a statement. The move comes under the process known as administrative wage garnishment, which allows the administration to withhold part of a federal or non-federal employee's wages. According to CNBC, the U.S. government has extraordinary collection powers over federal debts, and it can seize a borrower's federal tax refunds, wages, and Social Security retirement and disability benefits as well. The Education Department can legally seize up to 15% of a student loan holder's after-tax income to service debts.

Reports estimate that if the department scales up its wage garnishment efforts, millions of borrowers could be affected. As per the department, in April, over 5 million borrowers were in default, and another 4 million were delinquent, which means they hadn't made a payment in the past 90 consecutive days. Today, over 42 million Americans hold student loans, with the debt amount exceeding $1.6 trillion.

While borrowers have been under pressure because of a poor labor market and changes to the lending system, the recovery measure is set to add to it. Furthermore, provisions under President Donald Trump's "One Big Beautiful Bill Act" will place new caps on the amount students can borrow in federal student loans, eliminate deferments on the loans, and cut the repayment option to a limited set. The law will also phase out the SAVE plan, which had 8 million loan holders enrolled in as of October 2024, per the Brookings Institution.

Critics have argued that the wage garnishment will add stress to borrowers struggling with higher costs. “As millions of borrowers sit on the precipice of default, this Administration is using its self-inflicted limited resources to seize borrowers’ wages instead of defending borrowers’ right to affordable payments,” Protect Borrowers Deputy Executive Director Persis Yu stated in a press release.

As per CNBC, consumer advocates suggest that student loan borrowers contact the government's Default Resolution Group and other avenues to try to avoid the wage garnishment. The Consumer Credit Protection Act limits how much of a worker's pay can be garnished at a time. As per the law, after the garnishment, the borrower must be left with at least 30 times the federal minimum hourly wage ($7.25) a week, which is at least $217.50, a higher education expert told the publication. 

More on Market Realist:

Almost 9 million Americans are missing student loan payments — and one factor is to blame

4 student loan mistakes to avoid for smarter financial planning

Your car loans could remain expensive despite the US Fed cutting interest rates — here's why